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3.28.2018 - Free Investing Newsletter Bookmark

Moving Parts
 
It’s really hard to keep up. Every day there appears to be some new “fret” or some new development to think about. Consider this:
 
Last week the market was in a funk, as they blamed the mess on the China Tariff’s and how we’re probably going to be in a trade war. I held no such belief, and suggested that Trump is just being Trump. He tosses out outlandish ideas, see’s what gets the best reaction and works with it.

But trade didn’t end. The Chinese even acknowledged that some “concessions” are probably necessary. Then take note of South Korea. They screamed and made headlines suggesting that they’d take “full measure of response” to Trumps steel tariffs. Well, look what just happened:
 
WASHINGTON - The U.S. will be able to sell more vehicles and auto parts in South Korea under a deal the Trump administration Tuesday hailed as the first significant victory from its "America First" policy of imposing stiff tariffs on steel imports.
 
In addition to allowing more cars, the deal imposes a limit of about 2.68 million tons of steel Korea can export to the U.S. That amount is equal to about 70% of the annual average Korean steel exports to the U.S. between 2015 and 2017.
 
Under the renegotiated KORUS, South Korea also will allow the U.S. to extend its 25% tariff on imports of Korean pickup trucks by an additional 20 years to 2041. And South Korea will double - to 50,000 - the number of U.S. vehicles entering the country annually that don't have to meet Korean safety standards as long as they met U.S. standards.
 
So that’s their full measure response? See? Not a trade war, just a bit of negotiations to try and level the field a bit. Yes there will be bumps in the road, we haven’t had “fair” trade in decades. But the bottom line is that the US is the number one customer for a lot of the world’s goods, and they’re not going to cut off their nose to spite their face. Deals will get done.
 
Yet there are other things happening that do have big ramifications. The Chinese have launched their version of the “Petro-dollar” with a “Petro - Yuan” Now this, this is indeed big news. Let’s look:
 
The highly anticipated yuan-backed crude oil futures have been launched in Shanghai. China is the world’s biggest oil consumer, with eyes on rival benchmarks Brent and WTI as well as the US currency.
Trading of the new oil futures contracts for September settlement started on the Shanghai International Energy Exchange at 440.20 yuan ($69.70) per barrel, reports Chinese daily the South China Morning Post. Some 18,540 lots have reportedly been sold and purchased so far.
 
Experts see China’s yuan-dominated contracts as historic as the new futures symbolize the first time that foreign investors can access a Chinese commodity market. The launch ends years of setbacks and delays since the country’s first attempt at listing the securities in 1993.
 
Experts see China’s yuan-dominated contracts as historic as the new futures symbolize the first time that foreign investors can access a Chinese commodity market. The launch ends years of setbacks and delays since the country’s first attempt at listing the securities in 1993.
 
Okay, so what’s so troubling about that? Well, the US Dollar is the world’s reserve currency because we’ve had this deal with the Saudi’s for decades. The deal being that oil sales would ONLY be priced in US dollars. Thus, every nation had a reason to accumulate them. Now, China is threatening that little set up. Oh, and it could get really ugly. Consider the following:
 
China is the world's biggest crude consumer and buys most of its oil from Russia. However, most settlements are still in US dollars. The launch of the petro-yuan now allows Moscow and Beijing to use national currencies instead.
 
China and Russia are actively reducing dependence on the dollar in bilateral trade. In October 2017, Beijing launched a payment system for transactions in yuan and Russian rubles. This means that settlements for Russian oil deliveries to China, which have reached 60 million tons per year, can be done without using the dollar.
 
After Monday's launch of the yuan-backed oil futures in Shanghai, there have been negotiation between Russia and China on mutual promotion of oil futures in national currencies, RIA Novosti reported.
 
Because of this development, there’s been a few pretty well known analysts that are beginning to think that this is a major blow to the US dollar. ( It is) Let’s keep going here:
 
NEW YORK - China’s launch on Monday of its crude futures exchange will improve the clout of the yuan in financial markets and could threaten the international primacy of the dollar, argues a new report by Hayden Briscoe, APAC head of fixed income at UBS Asset Management.
 
“This is the single biggest change in capital markets, maybe of all time,” Briscoe said in a follow-up telephone interview.
 
This helps cement the exchange’s viability and challenges the petro-dollar system, in which oil deals are executed in dollars. This would decrease demand for the greenback and boost U.S. inflation.
 
Pricing oil in renminbi and launching a trading hub will raise China’s prominence and integrate it further in global markets. And demand for yuan from foreign investors eager to participate in the Shanghai International Energy Exchange will boost the currency’s value and divert trading away from the dollar. Appetite for dollars would shrink, driving the price of the currency down.
 
If you’ve been reading our letters for any real length of time, you know that I have done several articles suggesting that the Chinese wanted more global exposure for the Yuan. I predicted way back in 2010 that the Chinese wanted to get the Yuan included in the SDR basket ( special drawing rights) and they got that accomplished in October of 2016. That was a big step, and now that they got that, they’ve expanded with exchanges in 12 Countries.
 
Now however, they’re really throwing down the gauntlet. Oil ( except for very small trades) has been dominated by OPEC, and it’s all been priced in Dollars. Since every nation needs oil, every nation needed dollars. China’s entry into an oil backed currency threatens that. Why would the XYZ nation need to amass dollars, if they can buy oil via the Yuan, especially if they’re already trading good with China?
 
Russia and China have been very vocal about “hating” the idea that they are forced to use US dollars. Year after year, they’re both working on ways to get around it and this development is yet another thorn in the Dollar’s side.
 
If this exchange really grows legs, it IS going to damage the dollar. Now, what I will be watching is this: Most gold is priced in dollars, and if the US dollar really begins to slide as nations utilize the Yuan more, at some point, it “should” kick gold in gear.

Oh and just as a side note, nations that have tried to get away from using the Dollar, usually haven’t fared that well. Libya, Iraq, and others didn’t like the dollar much. How’d they turn out? Just sayin.
 
The Market:
 
More chop. Incredible, wicked, spontaneous chop. One minute you look and the DOW is up 150. Five minutes later it’s flirting with Red. Look again and we’re down 85. Look again and we’re up 22.
 
These moves aren’t predictable folks. These are computer driven buys and sells, mostly via the ETF’s and “baskets”. For most people, when they think of buying stocks, they think of a handful of companies. But institutions don’t deal in 1 or 2 or 3 stocks. They have 20, 40, 100 at a time that they’ll buy or sell.
 
That’s why when you look at a few stocks you see they all tend to go up or down in unison. Computer A sells a basket of 40 stocks. Every stock in that basket falls. Computer B buys a basket of 30 stocks, and every stock in that basket rises. And it happens in “seconds.”
 
Anyway, the last 5 trading sessions have been the textbook definition of chop. Today was as bad as it gets actually. I sat here and watched the DOW up over 200 points and mere minutes later we were flirting with RED. A few minutes later, we were up 90. Go figure.
 
We have done NOTHING for the last 5 sessions. There’s no trend in place and the trend is your friend. All this up and down chop, will do more to drain your account than anything else, as you get whipsawed back and forth.
 
So when all the gymnastics were over, we ended the day with the DOW down 9 and the S&P down 7. They had done it, they saved the day, and kept the S&P over its 200 day moving average.
 
That right there is the key folks. They know that if that 200 day fails, it could be a trapdoor opening to a much lower market. Today they held. Will it hold again tomorrow? Don’t forget that this week the market is closed on Friday for the Religious Holiday, making it a 3 day weekend. I’m not sure they’ll want to do a washout ahead of that, but I’m also not sure they’re going to do any serious buying.
 
I think tomorrow is a good day to do a lot of nothing. Granted we’ve been doing that for the past 5 sessions, but it has served us well. Getting whipsawed is not my idea of a good time.
 
Folks, I want to wish you the best for your upcoming Easter Holiday. For so many millions, this week is the ultimate spiritual time of the year, and I truly pray you enjoy it with your spouses, family and of course your friends. Take care everyone!

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